On January 23, 2018, Justice Masley of the New York County Commercial Division issued a decision in Bernstein Liebhard LLP v. Sentinel Ins. Co., Ltd., 2018 NY Slip Op 30169(U), holding that a law firm was entitled to business interruption coverage for the loss of new matters, even though its contingency fees for those matters would not have been received during the policy period.
The plaintiff, Bernstein Liebhard LLP (“Bernstein”), a mass tort law firm, sought coverage for loss of business income after a fire destroyed its offices. The firm’s business insurance policy covered “Net Income . . . that would have been earned or incurred if no direct physical loss or physical damage had occurred.” However, recovery for such business income losses was limited to 12 months after the date of the damage. As the Court explained, the law firm “had the capacity, lawyers, and staff to prosecute the cases for which it would have been retained during the applicable period, but the equipment damaged by the fire prevented it from taking those cases. Thus, but for the fire, Bernstein would have earned its fees when those cases settled or were tried to verdict, possibly years later.”
The insurer, Sentinel Insurance Company (“Sentinel”), argued that Bernstein was not entitled to any recovery for new matters for which the firm would have been retained, but for the fire damage, during the 12-month period because it would not have earned any contingency fee for those cases until years later. Justice Masley disagreed, explaining:
[R]ecovery is not precluded where there is a certain loss within the applicable period, even if the loss cannot be quantified until sometime thereafter. Here, an economist or other expert could identify the relevant existing mass tort cases during the 12-month period, and opine as to the present value of those cases, despite the fact that the amount of the loss may not have been determinable until years after the fire. . . .
To deny Bernstein coverage would be to punish it for its business model; that is, a mass tort business that is paid on a contingency-fee basis, as opposed to a traditional hourly basis. . . .
The business that Sentinel provided insurance coverage to, Bernstein, is a law firm; nothing it does concludes in one year. Sentinel accepted Bernstein’s payments and insured its business income losses. When it issued the Policy in July 2013 for the period August 1, 2013 to August 1, 2014, Sentinel knew that Bernstein was in the business of representing mass tort clients on a contingency-fee basis. Applying Sentinel’s theory of the coverage in this matter, there is no circumstance under which it would actually pay out for business income losses under the Policy. Sentinel’s interpretation of the Policy, therefore, renders the insurance illusory.
Justice Masley’s decision invokes the general principle that “an illusory contract – that is, an agreement in which one party gives as consideration a promise that is so insubstantial as to impose no obligation – is unenforceable.” Lend Lease (US) Const. LMB Inc. v. Zurich American Ins. Co., 28 N.Y.3d 675, 684 (2017) (citations omitted). “[A]n insurance policy is not illusory if it provides coverage for some acts subject to a potentially wide exclusion.” Id. at 685 (citations omitted). In this case, however, Justice Masley found that, under the insurer’s interpretation of the policy, the law firm would never be able to claim business interruption coverage. Thus, the policy had to be read in a manner that would give the coverage provision meaning in light of the realities of the firm’s business.